Rescission of Settlement of Labor Claims Requires Refund

Friday, January 16, 2026

Page 4

Court of Appeal:

Rescission of Settlement of Labor Claims Requires Refund

Opinion Says Notice That Workers May Opt-In to Putative Class Action by Setting Aside Contract With Employer That Resolved Any Wage Violations Must Explain That Repayment Will Be Required

By a MetNews Staff Writer

Div. Two of the Fourth District Court of Appeal has held, in a 2-1 decision, that a trial judge erred in ruling that a notice sent to a company’s workers indicating they may rescind individual settlement agreements with the employer relating to wage claims, based on a finding that the accords resulted from fraud or duress, and opt in to a putative class action need not include language saying that they will be required to pay back money received as consideration.

Acknowledging a dearth of case law “directly addressing rescission of settlements[] and proper curative notices in class action lawsuits,” the court declared:

“[T]he…notice should include language that if a class member chooses to rescind…, they could be responsible for repayment of the consideration…at the conclusion of litigation…, though the trial court maintains discretion to adjust the equities between parties…at the time of judgment.”

Acknowledging that “some employees may be discouraged from joining the class action lawsuit,” Wednesday’s opinion, authored by Acting Presiding Justice Douglas P. Miller and joined in by Justice Carol D. Codrington, asserts that the notice must include the refund language because “the plain [terms] of the rescission statutes do not authorize the trial court to forgive repayment at the outset of the litigation.”

Dissenting, Justice Michael J. Raphael wrote:

“This case requires us to consider a trial court’s equitable authority to craft a remedy where a corporate defendant in a proposed class action case has used misrepresentations to convince its workers, who are putative plaintiffs, to accept payments for releasing their claims. The trial court allowed the workers to void their agreements. But the court recognized that requiring low-income workers to pay back the money before joining the class—or even warning them that they may owe repayment later—can deter workers from joining the class. That could achieve one aim of this type of employer effort, to torpedo the class action by picking off plaintiffs with settlements.”

Statutory Scheme

At issue is the interplay between three statutes governing the rescission of contracts in California. Civil Code §1691 provides that, “[s]ubject to Section 1693, to effect a rescission a party to the contract must, promptly upon discovering the facts which entitle him to rescind,” give notice and “restore to the other party everything of value which he has received under the contract.”

Sec. 1692 specifies that “the court may…in its judgment adjust the equities between the parties,” and §1693, in turn, dictates that “[a] party who…seeks relief based upon rescission shall not be denied relief because of a delay in…tendering restoration …before judgment unless such delay has been substantially prejudicial.”

After Jessica Garcia filed a putative class action complaint against her former employer, The Merchant of Tennis Inc., in 2020, asserting various wages and break violations. After she moved for class certification in May 2024, the defendant opposed, noting that a “substantial portion of the putative class entered into arbitration or settlement agreements” which include a class action waiver.

That November, Garcia filed a motion seeking to invalidate the individual settlement agreements, claiming that the company had procured them based on fraud and coercion by making false statements about the how much the workers would likely recover in a class-wide lawsuit.

Last January, San Bernardino Superior Court Judge Tony Raphael (no relation to the Court of Appeal justice) found that the contracts were “voidable” and ordered the parties to send curative notices to the putative class members.

On Feb. 28, after the parties were unable to reach a consensus as to the terms of such a notice, the judge ruled:

“[T]he curative notice shall include language…that any amount already paid pursuant to a later-voided agreement will be treated as an offset to any other recovery by the putative class member. The Court may determine at a later date whether [the employer] is entitled to any offset. The putative class member will not be required to return any payment they previously received from [Merchant].”

Merchant filed a petition for a writ of mandate in Div. Two, seeking vacatur of the order.

Repayment Required

Miller said that “pursuant to [the] Civil Code…, even if the rescission was based on fraud or duress, the putative class members would be required to repay Merchant the amount they accepted in their settlement agreements” but rejected Merchant’s assertion that the refund must be immediate, commenting that “Civil Code section 1693 provides that repayment can be delayed until judgment.”

However, the justice was unpersuaded that §1692 contemplates an “adjust[ment]” of the “equities between the parties” such that the trial court was authorized to forgive the repayment requirement in light of the difficulty some class members might have in paying back the settlement funds. He remarked:

“[T]he plain language in the statute only discusses this equity principle at the time of judgment….While we acknowledge Garcia’s concern that some employees may be discouraged from joining the class action lawsuit, the plain language of the rescission statutes do not authorize the trial court to forgive repayment at the outset of the litigation.”

Noting that the federal cases relied upon by the trial judge did not address California’s rescission statutes, he was unpersuaded that they carried any authoritative weight. He declared:

“Let a writ of mandate issue directing the Superior Court of San Bernardino County to vacate its order of February 28, 2025, and reconsider the curative notice in accordance with this opinion.”

Dissenting View

Saying that “[t]his case…presents [the] important question [of] what procedures may a court fashion to rescind contracts in this context involving employer misinformation,” the dissenting justice wrote:

“Here, the trial court addressed the wrongful corporate conduct as California federal courts have. The court ordered the workers informed that if they rescind their release and join the class, they will have to repay the money the company paid them for their release only as an offset to any recovery….Where an employer has used misrepresentations to extract settlements from employees, this is an equitable remedy. The majority holds the California Civil Code statutes governing rescission of contracts preclude it. I respectfully dissent because I find no such restriction.”

Asserting that “the rescission statutes empower the trial court to act equitably,” he said:

“[Civil Code §1692] authorizes a trial court to adjust the equities ‘in its judgment’ but does not require the decision to be made at the time of judgment. The majority’s construction of ‘in’ as ‘at’ makes a critical difference in this situation: the workers must be given notice that joining the class action means the trial court might later require them to pay. This is precisely why the trial court made its equitable decision now.”

He acknowledged that the “tender back” provision of §1691 “appears mandatory if read in isolation,” but reasoned:

“The majority finds a strict rule in the statute that precludes the trial court’s judicious remedy here. The statute is in fact more flexible, and it should be construed to empower the trial court to ensure that wrongful acts are not rewarded. We should deny Merchant relief.”

The case is The Merchant of Tennis Inc. v. Superior Court (Garcia), 2026 S.O.S. 138.